Fresh warning of snap elections as reform fight looms in Serbia

By bne IntelliNews January 15, 2014

Nicholas Watson in Prague -

Serbia took another step closer to fresh elections on January 14, as Economy Minister Sasa Radulovic warned that failure to pass a series of reforms could trigger a vote.

Early elections are increasingly anticipated. As bne reported in November, bigwigs in the Serbian Progressive Party (SNS), the dominant power in the country's governing coalition, have been contemplating snap elections, in a bid to take advantage of the party's growing popularity since it swept into office in 2012. Much of that approval is down to a wave of reforms, a widening anti-corruption campaign and an atypical bout of honesty from its politicians about the dire state of the economy and the need to make hard choices.

Continuing the theme, Radulovic told the Reuters Global Markets Forum that proposed reforms to laws governing the labour market, privatisation and bankruptcy are crucial to building a sustainable economic recovery. "If the laws are not passed that means the political parties gave up on reforms and that it's better to have elections as soon as possible," Radulovic was quoted as saying.

To some extent, the government is in a race against time. The new legislation needs to be passed soon if the government wants to take up an offer from the World Bank to open discussions on February 27 over a loan. If successful, the $490m facility could come as early as March.

The international lender's resident representative in Belgrade, Tony Verheijen, said in December that the government could receive $250m in direct budgetary support for initiating reforms that could enable the sale or closure of 153 state-owned enterprises, which are costing Serbia an estimated €750m a year. A further $200m is designed to help improve banking supervision, including funds to boost the capital of the Deposit Insurance Agency. The remainder of the loan is destined for the creaking health sector. Depending on the pace of reforms, the World Bank might also approve an additional loan of $300m.

Verheijen described the package of laws on labour, privatisation and bankruptcy as "critical if Serbia is to perform better and boost employment." Unemployment now stands at over 20%, while economic growth is forecast by the World Bank to slow to 1% in 2014 from last year's forecast of 2%.

Belgrade also needs to get its finances in better order before it looks to open discussions in the next couple of months with the International Monetary Fund (IMF) about a new $1bn stand-by loan agreement. A new IMF deal - which would replace a previous programme frozen in 2012 - is seen as a key pillar to attract more investors into the economy.

On February 13, Aasim Husain, deputy director of the IMF's European department, said Serbia had made strides in controlling its 2014 budget, but needed to do more to ensure fiscal stability in 2015 and 2016. Serbia's 2014 budget targets a deficit of 4.6% of GDP, slightly down from the 2013 forecast of 4.7%, but spending on things like those loss-making state enterprises could push the consolidated deficit above 7% of GDP.

Inevitably, closing firms and reducing a bloated bureaucracy that employs about 10% of the population at a time of such high unemployment remains controversial. Radulovic said the government has set aside RSD20bn (€173m) to help redundant workers to cope with job losses, though this will do little to mollify opposition parties, and perhaps even some factions of SNS' coalition partner, the Socialist Party, which is headed by Prime Minister Ivica Dacic.

The marriage of the two parties was one largely borne of convenience, due to SNS' failure to secure enough votes to form a majority at the last parliamentary election. However, sources say party leader and Deputy PM Aleksandar Vucic feels that the time is now right for a new election. Given the party's popularity, and with the most difficult policy decisions yet to be taken and their effects felt, Vucic apparently thinks SNS will have few better opportunities to win control of the parliament for itself.

The SNS leader also looks set to purge ministers and officials loyal to President Tomislav Nikolic, who was the main founder of the party when it broke away from the ultranationalist Serbian Radical Party in 2008. Analysts say the party's annual congress on January 25 looks likely to form the backdrop for the announcement. A possible election date is March 16, which would likely coincide with municipal elections in Belgrade.

"Failure to pass these key laws would provide the government with a nice segue-way into calling early elections, with the aim then of securing a fresh mandate for key reforms," says Tim Ash of Standard Bank. "I view early elections as a net positive for Serbia, as I think the SNS is serious about the reforms mentioned by Radulovic, and understands that time is running out, and it will need to move fast in a new SNS-majority term to front load reforms which could be transformational for Serbia."

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